From bang to bust: The Kingfisher story

He owned India’s biggest liquor company, a private jet, an Airbus and many other riches. Then in 2005, Vijay Mallya launched Kingfisher, an airline to match his style and flamboyance. Khushboo Narayan, Johnson T A and Shaji Vikraman tell the story of how Kingfisher went from bang to bust.

Written by Khushboo Narayan , Johnson T A , Shaji Vikraman | Updated: March 14, 2016 2:50 pm
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Sometime in 2006, the Mumbai-based IDBI Bank got a proposal from Kingfisher Airlines, seeking funds to acquire aircraft. Vijay Mallya had launched the airline the previous year, in May 2005, on his son’s birthday and he had been cruising. He had bought Shaw Wallace, one of the oldest liquor manufacturers in India, for Rs 1,300 crore from the Chhabria family after the death his arch rival, Manu Chhabria, in 2002. He had topped that by striking a deal with the British beer maker Scottish and Newcastle, which had bought a 37.5 per cent stake in Mallya’s United Breweries Ltd for Rs 940 crore.

Also Read | I hope that I return one day… India has given me everything: Vijay Mallya

That was also the time most Indian business houses, riding on easy liquidity and buoyant growth, were getting into infrastructure projects — building airports, ports, power plants, roads and acquiring mines. However, when the Kingfisher proposal came up at a meeting of the credit committee of the IDBI in those go-go days, not many were convinced about financing the aircraft acquisition plan. They had their reasons: The highly competitive airline industry was known to be a capital guzzler and this, after all, was a fledgling airline. There was another reason too. Much earlier, as a development financial institution, IDBI had encountered lending problems while dealing with Mallya after his acquisition of Mangalore Chemicals and Fertilisers. So the committee chose not to approve the proposal.

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But a few years later, in 2009, the bank provided a loan of Rs 900 crore to Kingfisher, a decision that has come to hurt top officials of the bank, who are now being put on the wringer by the Central Bureau of Investigation (CBI) and other agencies with Mallya being declared a ‘wilful defaulter’.

So how did it all go so horribly wrong for Mallya? Even before Kingfisher could be launched, the aviation industry had started bleeding. Crude oil prices were high, with fuel costs often making up half the operating costs of airlines. But Mallya announced his would be a premium, world-class airline. He personally hired his airhostesses and Yana Gupta, a Bollywood actor, performed in a video that showed safety instructions before take-off.

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The service standards and comfort provided by the airline in the initial years attracted many passengers, marking it out from other full-service airlines in the business then. Mallya, by now unstoppable, moved to acquire a bleeding Air Deccan in 2007 (the deal was completed in 2008), with the group’s cash cow and holding company, United Breweries Limited, paying Rs 550 crore to buy a 26 per cent stake in the low-cost carrier promoted by Captain G R Gopinath. Many say it was this decision that led to the grounding of Kingfisher Airline years later.

At its peak, Kingfisher Airlines was the second largest airline in India in terms of the number of passengers it carried. The Deccan acquisition was ostensibly to allow the airline to fly internationally (airline rules in India say carriers can go abroad only after they complete five years of operation and have 20 aircraft). In September 2008, three years after Kingfisher first took to the skies, the airline launched its Bengaluru-London flight.

mallyaBut as oil prices started to climb (an average of $72.68 a dollar between 2005 and 2010) and the company struggled to run a business that included a full-service airline and a low-cost carrier, its finances floundered and its debt burden and losses surged. By the end of March 2008, Kingfisher’s debt had mounted to Rs 934 crore. A year later, it had multiplied to Rs 5,665 crore. Its net losses widened from Rs 188 crore in 2007-08 to Rs 1,608 crore the following financial year.

“That acquisition of Air Deccan marked the end of Kingfisher Airlines,” says a person who worked closely with Mallya during that phase and who did not want to be named. “At that time, there was excess capacity (more supply of seats than demand) in the aviation sector and Air Deccan was lowering ticket prices to Re 1, Rs 400 and so on, and that was not viable. Besides, fuel prices and sales tax and other levies had dragged down all aviation companies in the country.”

So Kingfisher was not alone to ride the rough skies. As crude prices soared towards $140 a barrel, the global aviation industry too was facing a crisis. In 2008, the International Air Transport Association (IATA), the global aviation industry body, estimated losses of $5.2 billion. For airlines in India, the hit was much harsher with taxes and levies topping oil prices. If that wasn’t bad enough, the global financial crisis struck, growth started sliding and the aviation script went haywire.

By 2009-10, Kingfisher Airlines had accumulated a debt of over Rs 7,000 crore. It continued to pile up losses and had already turned net-worth negative the previous financial year. That was also the year Kingfisher Airlines turned into a non-performing asset or a bad loan for banks. In November 2010, banks for the first time restructured Kingfisher’s debt. The consortium of lenders led by State Bank of India converted Rs 1,355 crore of debt into equity at a 61.6 per cent premium to the market price of the Kingfisher Airlines stock. Besides, the bankers stretched the period of repayment of loans to nine years with a two-year moratorium, cut the interest rates, and sanctioned a fresh loan.

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However, a breather on loan repayment wasn’t enough to revive Kingfisher Airlines, which continued to bleed with every passing year. The flamboyance of its promoter, who was then a Rajya Sabha MP, attracted it even more attention, enough to prompt questions in Parliament on the airline’s bad loans.

In reply to one such question in 2011, Namo Narain Meena, former minister of state of finance, said Kingfisher Airlines had pledged its brand to banks for an estimated Rs 4,100 crore. Meena also said Mallya had given a personal guarantee of Rs 248.97 crore while United Breweries Holdings has provided a corporate guarantee of Rs 1,601.43 crore.

“In addition, Kingfisher has provided a pooled collateral security of Rs 5,238.59 crore, which includes Kingfisher House in Mumbai, Kingfisher Villa in Goa, and hypothecation of helicopters. Besides, the pledged securities include ground support and other equipment (Rs 101.58 crore), computers (Rs 22.43 crore), office equipment (Rs 13.39 crore), furniture and fixtures (Rs 33.35 crore) and an aircraft (Rs 107.77 crore),” Meena had said. In short, Mallya had pledged all of Kingfisher’s movable assets.

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But that didn’t stop Mallya from drawing huge salaries from Kingfisher — Rs 33.46 crore each in 2011 and 2012, according to some reports.The official spokesperson of Mallya declined to comment for this story.

In 2012, Kingfisher Airlines was grounded, leaving its employees with unpaid salaries. The company had allegedly not deposited its employees’ provident fund to the government and had run losses in excess of Rs 4,000 crore in 2012-13. Its accumulated losses ran into Rs 16,023 crore, while its net worth fell to a negative Rs 12,919 crore at the end of March 2013.

In April 2015, Mumbai International Airport Private Limited (MIAL) sold Mallya’s personal aircraft (its registration number, VT-VJM, matches his initials) for Rs 22 lakh to recover airport dues of the grounded airline.

As trouble mounted, Kingfisher Airlines was chased by the service tax department over non-payment of service tax of over Rs 115 crore. The department seized eight aircraft and helicopters of the company, including Mallya’s prized Airbus A319, which it now plans to auction. On March 7 this year, the service tax department moved the Bombay High Court, asking for impounding of Mallya’s passport and seeking his presence in the ongoing court case. The airlines had also defaulted on crediting over Rs 372 crore of Income Tax deducted at source from employees.

In February 2013, the airline’s flying permits were withdrawn. But Mallya didn’t give up. “Although KFA’s licence has expired on December 31, 2012, under civil aviation regulations, KFA has a period of 24 months to reinstate the same. A revival plan has been submitted to the DGCA which is under consideration. Further, discussions are in progress with some prospective investors for restarting the airline operations,’’ Mallya said in the 2012-13 annual report of UB Group (Holdings) Ltd, the holding company for Kingfisher Airlines.

Earlier, in 2012, in a letter to Central Board of Direct Taxes Chairman Laxman Das, Mallya sought time to pay the company’s Income Tax dues while hoping new government policies would help revive Kingfisher.

“The Income Tax authorities attached all our bank accounts and our main IATA collection account, with the result that we are completely crippled and have been unable to make any payments to any party including salaries to 8000+ employees,’’ Mallya said in the March 9, 2012, letter to the CBDT chief.

The letter went on to say: “The Government of India (is) reportedly taking several policy initiatives to help the stressed aviation sector. This will help the industry and also Kingfisher Airlines. We are in active discussion with serious investors and are confident that we can introduce fresh equity and recapitalise Kingfisher Airlines in the near future.”

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“He never thought Kingfisher would shut for good. He kept thinking it could be revived. I have seen him try really hard to get the airline going. In the end, Kingfisher was run very badly and as a result, it became a mess,” says a close aide of Mallya.
In 2013, when a consortium of 14 banks led by the SBI approached UBHL for payment of what was then an outstanding of Rs 6,493 crore in loans to Kingfisher Airlines, Mallya wrote back saying a significant amount would be settled when British alcoholic beverages giant Diageo Plc buys stake worth nearly Rs 5,000 crore from UBHL and others in the Diageo-Mallya owned United Spirits Limited (USL).

“USL is a company he loved because his father had set it up and he never thought he would have to leave USL,’’ says the Mallya aide.

In July 2013, UBHL and Kingfisher Finvest India sold USL stake then worth around Rs 2,400 crore to Diageo, but in December that year, a division bench of the Karnataka High Court annulled the deal on a plea by the consortium of banks that the sale of UBHL stake in USL to Diageo was contrary to agreements between Kingfisher Airlines and its creditors where UBHL is the guarantor.

The matter is now before the Supreme Court, and Diageo, Mallya’s companies and their lenders agreed in November 2015 for the dozens of petitions in the matter to be heard in April 2016. The Supreme Court has assigned April 6, 2016, as the tentative date for this matter.

United Bank of India was the first lender to declare Kingfisher and Mallya a ‘wilful defaulter’ in May 2014. The same year, the SBI too issued a notice to tag Kingfisher Airlines, Mallya and United Breweries Holdings as ‘wilful defaulters’. The SBI notice of August 19 has alleged diversion of funds by Kingfisher Airlines to UB Group of companies and other firms. Mallya has challenged the decision of United Bank and the SBI in various courts. In February, Punjab National Bank, another lender, declared Mallya and Kingfisher a wilful defaulter.
According to a senior bank official, who did not want to be named, banks have conducted over 500 hearings with top Kingfisher company officials on loan recovery but very little came of these meetings.

“The Kingfisher case is an example of collective failure of the system. The banks should have declared it an NPA much earlier. Why did the RBI even clear the restructuring of Kingfisher? Even now, the way banks are going after Mallya, they will not be able to recover any money. A criminal case or money laundering investigation will only focus on prosecution, not on recovery of money. Do you think Mallya will not contest the case? So in all this, how will banks recover their money? Instead, banks should look at one-time settlement of dues,” says K C Chakravarty, former deputy governor of the Reserve Bank of India.

The SBI on Thursday denied allegations that banks have been slow in moving against Kingfisher Airlines. “We reaffirm that our bank moved very promptly on taking the appropriate legal steps required to protect banks’ interest and public money,” SBI said in a statement.
Mallya is currently fighting at least 27 cases in various courts. Of these, at least 22 are related to loan default by Kingfisher Airlines — an amount that stood at Rs 9,091.40 crore at the end of November 2015, according to Union Finance Minister Arun Jaitley, who spoke in Parliament on Thursday.

Besides, the CBI is investigating Kingfisher for defaulting on the Rs 900 crore loan that IDBI Bank gave Kingfisher Airlines in 2009. Last week, the Enforcement Directorate also registered a money laundering case against Mallya and a few IDBI Bank officials. An email sent to IDBI Bank went unanswered.

Meanwhile, Mallya’s troubles have only been growing. In February this year, the board of United Spirits Limited (the company his father set up) asked him to resign as chairman after an internal probe alleged financial irregularities. The man himself, meanwhile, is supposed to be in London after signing a Rs 515 crore sweetheart deal with United Spirits and marking attendance in the Rajya Sabha on Monday.

On March 11, he tweeted, “News reports (say) that I must declare my assets. Does that mean that Banks did not know my assets or look at my Parliamentary disclosures?”